- On paper, the Fed has no reason to care about stock markets. This is not the case for the credit markets. Public equity markets are used by insiders as an exit strategy, very little capital is raised. Conversely, industrial capitalism runs on debt: both public market debt (bonds, securitisations) as well as private debt (private placements, bank debt). If the funding markets dry up, even solvent firms (i.e., positive equity value) can run into liquidity issues as they need to continuously roll over debt. Central banks have no choice but to act as a lender of last resort.
- Bank equities are probably the most obvious candidate to watch for such stresses.
- One might easily be more cynical about Fed personnel’s attitude towards equities. American elites are obsessed with the stock market, and central bankers are part of the elite. This was probably more of an issue during the Greenspan Fed era, as there was greater confidence in the equity market being a leading indicator for the economy, as well as strong beliefs in the importance of the “wealth effect.”
- A rout in energy prices will knock a big hole in headline inflation, which will feed into “inflation expectations” for many individuals. That reduces the urgency to hike.
- Crypto blowing up is not only hilarious, it might reduce the demand for high end chips. This in turn could reduce some of the knock-on supply chain problems. Otherwise, the collapse of crypto and tech darlings is a non-issue for central bankers.
Although I respect the idea that some levered players are being liquidated in the “tech” area, expecting another six weeks of weak equities is quite a hurdle to jump. Luckily for me, I do not give investment advice, so forecasting whether that happens is not my problem.